The term may seem unnerving initially, but once understood can reveal just how valuable it can be.
Alternative finance has become increasingly popular with businesses in the last decade as there are a series of benefits alternative finance offers over traditional methods. We take a look at the differences of 4 key aspects of business funding:
Appetite
When we say appetite, we’re not talking about lunch (unfortunately!), we mean to what degree a lender wants to loan out.
Business lenders all have their own objectives and targets when lending, and each will have their own level of risk appetite.
Traditional lenders such as banks are typically extremely risk adverse when it comes to business lending, most will have a criteria suited to those of very low risk, but can leave businesses deemed to be riskier without the same opportunities to access finance.
On the other hand, many alternative finance lenders have a broader risk-appetite. This means they will be willing to lend to a wider range of businesses, in turn potentially enabling your business to access funding when traditional methods aren’t available.
It’s reported that the UK online alternative finance industry market volume grew by 35% year-on-year to reach £6.19 billion in 2017.
Source: View source.
Process
Traditional lenders have shown a tendency to stick with a more conventional process when it comes to business lending. Although most now facilitate applications via their website, many still require one or more personal meetings in order to assess the circumstances. Moreover, the speed at which applications are processed are typically not fast. It is not uncommon for a business to be waiting a number of weeks to complete the process from start to finish, or at least receive a decision for their application.
Alternative lenders typically work in the opposite way. The majority of alternative finance lenders will be able to receive, review, and make a decision on an application solely through an online process, there is often little need meetings of any sort.
In addition, many alternative finance providers aim to review and complete an application in lightning speed, with some even able to make funds available on the same day . This can be extremely useful for business that need access to funding quickly.
Flexibility
Once a finance contract has been agreed between a business and a traditional finance lender, altering or settling the agreement is likely to be a less than speedy process. They may wish to discuss the matter in person, commonly via an appointment only basis. This limits the level of flexibility traditional finance providers can offer.
By contrast, alternative finance lenders often provide clients with access to an online portal. This enables the borrower to access, change or make payments to the agreement quickly and easily, often without the need for any interaction with a lender representative. This adds a great deal of flexibility to many alternative funding providers, enabling the borrower to be in control.
Methods
No two business are identical, and unlike a robe, there is no one-size fits all lending product. Those new to the world of business finance may be under the impression that a business loan is just a loan, when in fact this isn’t always the case, not with alternative finance anyway.
Conventional type loans are often preferred via traditional lenders, such as commercial mortgages, or generic business loans, however the market somewhat widens with alternative finance. Many alternative finance providers are able to offer different style funding that is more suitable to the business, making it easier for the business to manage, and provide additional benefits. Methods of finance such as Merchant Cash Advances or Revolving Credit Facilities allow for a greater degree of flexibility that may otherwise not be available from traditional lenders.
Repayment
Just like most businesses, lenders need to make a profit. They do so by charging interest and/or fees on their financing products. This is understandable, but when it comes to early repayment many traditional finance providers will still expect to make a healthy profit even if the loan is settled before it is due. This is typically accounted for by charging early repayment penalties if the debt is settled early, whereby the client is charged a fee for settling their agreement earlier than expected.
To a degree this is understandable, but certainly not favourable by the borrower. There may be scenarios where early repayment is likely, so why should you be penalised for it? Fortunately, this frustration can often be avoided when using alternative finance lenders. Many alternative finance lenders offer an increased degree of flexibility over traditional lenders and do not charge early repayments fees, whether partial or in full.
If this is a key factor for your business funding requirements, alternative lending may be the better option for your business. It is essential to check the terms and conditions of any agreement before signing to make sure you fully understand the contract, including details of any early settlement fees, regardless of the type of lender.
What are the disadvantages?
Alternative finance can provide a vast array of benefits compared to traditional methods; however, the best option is dependent on the business’s funding requirements. It may not be suitable for all businesses as there can be drawbacks, such as:
Rates
As discussed earlier, alternative finance providers typically have a greater risk-appetite than traditional lenders, meaning they are more likely to accept risker businesses than conventional lenders. This is great for some businesses, but not without a compromise.
In order to counteract the increase in risk, alternative finance lenders typically charge higher interest rates compared to traditional lenders. The rates at which they charge are dependent on a range of factors, but it’s unlikely they’ll be as competitive as traditional lenders.
Terms
Another method alternative finance providers use to limit their risk is to decrease the length of time they’ll offer you the finance for. This will save you in total interest costs compared to a longer term with the same rate, but it means that the repayments will be higher. This may suit some businesses, but could compromise cash-flow for others.
Amount
Alternative finance providers will make an assessment of your finance application based on the information that is available to them, however in most cases they won’t have any previous relationship with you. This, along with other factors, typically means they may only offer a limited amount in order to reduce their risk, especially if it’s their first agreement with you.
Payment frequencies.
Common practice for most business finance is to make repayments on a monthly, or 30-day basis. This is generally accepted as the norm; however, this may not be the case with all alternative finance providers.
Some may require payments to made bi-monthly, weekly or even daily, which can result in the facility not being as suitable compared to traditional methods.
The bottom line
Alternative finance providers can offer a number of advantages over a traditional finance provider, but it is dependent on the needs of the business. It’s important to fully assess your individual situation, and to consider all of your options before proceeding with any business finance.
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